All Forum Posts by: Nick Moriwaki

I surely hope no one has said not to pay off a loan with a higher interest rate first, whether it be a rental property, credit card, etc.  However I think using examples with lower interest rates illustrate that this is applicable to anyone, not just people with rental properties at 6% since a common counter-argument is that you shouldn’t pay off a 3-4% mortgage faster than you need to.  

As far as @Brent Coombs, I’m still waiting for a response to my updated numbers (pg 26) after you said “HELOCs only suit folk whose income far exceeds their expenses".  

The crux of the issue is that a 3-4% mortgage loan pays 60-80% total interest to balance over the course of the 30 years.  This is a significant ratio even with a "low" interest rate.  So it really depends less on the debt percent and more on how the debt is paid off and what the rest of your money is doing for you. 

99% of these 27+ pages have been focused around proving/disproving the returns of using a strategy of pulling a HELOC and using it to make large chunk payments to the mortgage.

I have been somewhat alone on an island trying to spark a discussion revolving around replacing your mortgage with a LOC (of the same amount and same percentage) and routing all your income/expenses out of it. So instead of your bank account increasing with your monthly cash flow that will be seen in the HELOC as a lower monthly balance. It functions on the same principle as making additional monthly payments to your mortgage, except 100% of your additional monthly income will be "paid" to your HELOC. I say "pay" because the money is not locked up like it is in a mortgage, preserving your ability invest it in the future. In an earlier post there is a spreadsheet where I demonstrate how significant the savings can be depending on one's financial situation. Take a look and see if you still think this is just for "peace of mind".

It wasn't meant to be an apples to apples comparison. The purpose of my argument is explain the benefits of the strategy as opposed to others. Yes you can match the savings by putting all your money towards the loan and pull a HELOC as a buffer, but would require way more equity than you would with the strategy I'm suggesting so scratch a decent amount of people off the list as eligible to even employ that strategy.

Then for those that do have the equity to qualify, there is a significant opportunity cost associated with keeping the mortgage and using the HELOC as buffer. Say there is a great investment opportunity that arises or your car breaks down and you need a new one, you only have the balance in your HELOC as your buffer since you can't pull any of that extra money you put into the mortgage without refinancing. You don't sacrifice that by substituting the mortgage for a HELOC. I do agree that there is a risk factor out there that needs to be considered and these examples are on the extreme end of how you would structure your finances so I'm by no means suggesting people out there mimic what's on the spreadsheet. However I think people are too quick to gloss over any HELOC strategy and try to make it an apples-to-apples comparison when (at least for me) it's not intended to be.

These are just numbers that are used in comparison to someone in the exact same situation. Feel free to change around the numbers as you see fit and see if you can show that the results are insignificant. Keep in mind that the $3K you refer to is not extra pocket money because that does not include the loan payment (mortgage or HELOC). So in reality it's $2K cash flow with the mortgage.

I made a quick adjustment to half the monthly cash flow from $2K to $1K and drop the savings account from $50K to $20K.  The results:

• HELOC paid off in 108 months with $34K in interest
• 108 months of mortgage interest is just under $65K
• Total mortgage interest is $130K in 330 months

The one difference is that total interest becomes comparable when running the conservative scenario of 1% yearly increase to the HELOC rate. The total interest in that scenario becomes $95K. Still $35K of total interest saved in comparison even when paying 14% at the end of the HELOC.

So I'm still not seeing your point that it only applies to people with large bank accounts or significant cash flow.    

1) The $50K could be anything really. The point there being that whatever money you had would be better served in the HELOC than in a bank account.

3) I honestly put very little effort in maintaining the strategy. Money comes in and I move it to pay off the HELOC. A few mouse clicks every few days is all it is.

Really? The reason I'm so persistent here is that I feel like many of us here can utilize the strategy (assuming obtaining the HELOC is not an issue) since we are all investors. But hey, to each his own. I definitely echo your sentiment in that people need to be open to seeing that mortgages are not hocus pocus interest loaded loans.

Let's model out an example to see if we're on the same page. I'll stick to $200K remaining mortgage with $50K savings. Mortgage is 4% with a payment of $1K/month and income is $5K/mo and expenses are $2K/mo ($3K cash flow/mo without factoring in the mortgage/HELOC). And let's say property value is high enough to obtain a $200K HELOC to replace the mortgage balance.

My numbers run out like this. You zero out the HELOC in 55 months paying just over $14K in interest to the bank. Meanwhile in those 55 months the $35K of mortgage payments went to interest. In addition, if you continued to make your minimum monthly payments to the mortgage, you would end up paying just north of $130K in interest over the course of 330 months. Meanwhile, after month 55, the HELOC strategy pays no additional interest (since the balance is paid off). I don't see these numbers as insignificant and I don't see this scenario as unreasonable. For kicks, I also inflated the HELOC interest 1% a year until completion and came out with an additional $5K in interest over an additional 2 months.

See the numbers here.  Let me know if you have any issues with the calculations.  You can ignore the middle column - that is there to compare a standard mortgage acceleration model.  

 Glad we're getting somewhere.  Let's see if we can clear up some of these issues.  

1) Not enough existing funds to make it worth while - what exactly do you mean by this? For simplicity let's stick with the example I used in the recent post ($200K mortgage, $50K savings --> $150K HELOC balance ($200K limit) and $0 savings). Are you referring to having $0 in savings as not enough funds? Because you could always pull whatever funds you needed from the $50K you dumped into the HELOC.

2) Lack of access to the HELOC products you mention - This is an interesting one. The only unique thing in Hawaii that I was aware of was the promotional interest rates. Are you folks not able to take a HELOC to pay off an existing debt (e.g. - that same mortgage)? It's interesting because even here, some loan officers are confused at the concept and will strictly look at a second position HELOC as the only option. If that is the case, then yes, this may be a niche strategy, but still very feasible for those with a decent amount of equity.

3) They have better ways to use the money - Using the HELOC does not keep you from realizing these opportunities. In fact, that's what makes the strategy so great, it allows you the best of both worlds. You can use an accelerated pay down strategy while waiting for an opportunity to present itself. Say you're eyeing the market for a rental property. Most people save money until a good rental hits the market and they're ready to buy. With the HELOC strategy you just store your savings in your HELOC (saving you whatever interest rate you're paying) until you're ready to close. Then just write the check from the HELOC. While the other person has money sitting in their savings earning 2%, you're saving 4% on your HELOC interest.

4) They prefer the safety of a fixed mortgage compared to a HELOC - Can't argue with this one and this depends on risk vs reward based on potential future scenarios. I've heard horror stories from some people regarding HELOCs and how they're called due if ever there is a market shift. But I'm thinking that was a market crash anomaly. Why would a bank call a LOC due if the property value drops? If you're still paying then the bank is still making the same interest that they are making on the mortgage (as we've discussed at length here in the forum).

It is true that in Hawaii we get access to promotional rates, but my examples don't use promotional rates to prove what I am saying. If you read my post I said that if you convert the mortgage to a HELOC (i.e. - replace the mortgage balance with a HELOC balance), you are able to put 100% of your money towards the principal and at no point is money sitting idle (or earning less interest) in a checking/savings account. Are you arguing that it is possible to match these payments while keeping a traditional mortgage? If not, then the method will quickly accelerate past any pay down strategy that keeps the mortgage.

@Jeremy Z.

Completely with you. The example is unique compared to everything else I've seen posted on here. But that's the reason I keep chiming in - it shouldn't be. I've always used that method, but I used to be one of those people who thought the chunking strategy also worked, just with a little more complicated math. That is until I started going back and forth on these forums and realized that interest isn't front loaded in a mortgage any more so than it is in a HELOC. That's what made me realize the mortgage to HELOC conversion is the only HELOC strategy that actually works and I've been trying to pitch it to people on both sides of the argument.  Unfortunately I feel like I keep getting brushed aside since "that's not what all the pro-HELOC people are saying".  

As a side question - are you saying the scenario is unique because no one uses it or that it isn't feasible to employ?  That's what I've always wanted to get to the bottom of.  I feel like most people think it's a fairy tale scenario that works but can't reasonably be applied to most people when in reality I think it's very applicable to almost everyone here.  

@Storm S.

The method I described saves you the interest of the mortgage per day since you no longer pay that interest whenever that money is sitting in your HELOC.

So for example if my principal were $200K @3% and I had $50K in my savings account earning 2%. I'd rather have a HELOC balance of $150K @3% and $0 in my 2% savings account. Essentially I'm "earning" 1% a day on the $50K by putting it into the HELOC rather than in the savings.